A/HRC/22/42 activities, the transfer abroad of such funds in contravention of relevant laws (such as nonpayment of applicable corporate taxes or breach of exchange control regulations) makes them illicit. Thus, illicit funds are funds which are illegally earned, transferred or utilized and include all unrecorded private financial outflows that set in motion the accumulation of foreign assets by residents in breach of relevant legal frameworks. 2 6. Commonly used methods to evade taxation include trade mis-invoicing and transfer mispricing. Trade mis-invoicing occurs when businesses or individuals shift money abroad by falsifying trade documents (for example, prices in a customs invoice). A buyer and a seller may collude in a scheme in which the buyer only pays the standard market price for imported goods, but is billed for the goods at a higher price. The seller then deposits the difference in a bank account in a secrecy jurisdiction on behalf of the buyer, thus siphoning funds abroad and preventing national authorities from collecting much needed taxes. 7. Transfer mispricing refers to a similar process within multinational companies to evade taxes. A subsidiary of a company avoids paying taxes in a high taxation country by selling its products at a loss to a subsidiary in a low tax country, which then sells the product to final customers at market price and yields the profit. 3 The Organisation for Economic Co-operation and Development (OECD) estimates that a significant percentage of all international trade is intergroup trade occurring between related companies, thus providing multinational corporations with opportunities to shift profits within companies in its own group to make sure that the accounts show high profits in low-tax jurisdictions.4 While tax evasion, breaking national tax laws, is illegal, many tax avoidance schemes comply with existing laws and regulations. As one researcher has recently noted: “While some of the corporate practices used to dodge taxes are clearly illegal, such as false invoicing and trade mispricing, in many cases these are difficult to prove, given the lack of adequate instruments to effectively regulate them. Other means of shifting profits intragroup are legal or semi-legal yet ethically highly questionable.”5 8. Such tax evasion schemes are a concern to all countries struggling with tight budgets and cuts in essential services. However, owing to, inter alia, their resource constraints and 2 3 4 5 See Dev Kar and Karly Curcio, Illicit Financial Flows from Developing Countries: 2000-2009 – Update with a Focus on Asia (Global Financial Integrity, 2011), p. 3. Recently, corporate tax dodging practices in Europe and the United States have attracted international attention. In November 2012, the managers of Starbucks, Google UK and Amazon appeared before the Public Accounts Committee of the British Parliament to explain why they reported only very limited profits for their business in the United Kingdom of Great Britain and Northern Ireland, through using more favourable European tax jurisdictions, such as the Netherlands, Ireland and Luxembourg to pay corporate their taxes (see BBC World News, “Starbucks, Google and Amazon, grilled over tax avoidance”, 12 November 2012. Available from www.bbc.co.uk/news/business20288077). Amazon UK is reported to have generated sales of more than GBP 3.3 billion in the United Kingdom in 2011, but paid no corporation tax on any profits in the United Kingdom for that year (see Ian Griffiths, “Amazon, £7bn sales, no UK corporation tax”, The Guardian, 4 April 2012). In the United States of America, the Senate Permanent Subcommittee on Investigations has held similar hearings into tax evasion practices of technology companies, including Apple, HewlettPackard and Microsoft (see Charles Duhigg and David Kocieniewski, “Inquiry into Tech Giants‟ Tax Strategies Nears End”, New York Times, 3 January 2012). Apple was reported to pay only 2 per cent corporate tax outside the United States (see BBC World News, “Apple paid only 2% corporate tax outside the US”, 4 November 2012. Available from www.bbc.co.uk/news/business-20197710). OECD, “Intra-industry and intra-firm trade and the internationalisation of production” in OECD Economic Outlook, No. 71 (2002). Available from www.oecd.org/dataoecd/6/18/2752923.pdf. Øygunn Sundsbø Brynildsen, “Exposing the lost billions”, Third World Resurgence, No. 268 (December 2012), p. 22. 5